Re-thinking risk

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As aftershocks continue to hit Japan, and automotive plants around the world adjust to shortages of key components, perhaps it’s time to re-think our approach to supply chain risk.

Honda’s decision to cut production at its Swindon plant due to problems of parts supply from Japan, illustrates the acute vulnerability of some of the world’s largest industries to a natural disaster affecting a sensitive location. They are far from alone. PSA Peugeot Citroën slowed production recently at seven plants in France and Spain, and General Motors cancelled shifts at its Opel plants in Spain and Germany. Other manufacturers experienced similar setbacks in North America.

The complexity of modern supply chains has greatly increased the risk of disruption. However, there are aspects of our approach to risk management that are puzzling.

As the risk of disruption increases with the lengthening of supply chains, a trend we might have expected to see in recent years is an increasing use of multiple suppliers to off-set this risk. But this has not been the case. The trend has been to reduce the number of suppliers. What’s more, as products become more complex, a buyer has less visibility of where all the elements of a component come from. Second or third tier suppliers that are far from sight may well be a source of risk – as has proven to be the case when some car makers recently found, to their surprise, that components had sub-parts sourced from Japan.

Single sourcing of components is far from uncommon and even where two or three suppliers may be used, often these suppliers may be concentrated in the same region. According to a report from researchers IHS iSuppli, Taiwan is the world’s leading country for semiconductor foundries, accounting for 67 per cent of global production. 58 per cent of small/medium-sized liquid crystal display panels are also made in Taiwan. Similarly with South Korea, 59 per cent of global production of DRAM is manufactured in the country, with 40 per cent of world capacity concentrated in the Seoul area.

Risk and cost are intrinsically linked. Fewer suppliers may allow for more alluring prices, but buyers should be attuned to the wider risks they face in a global market that may be more localised than they think.

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